The Five Questions Every Investor Should Ask

I’m amazed at how often people get into heated discussions about the minutiae of their portfolios, with long debates over the effect of value tilt, last week’s jobs numbers, whether the EU crisis means we should focus less on international markets, or the short term performance of their portfolio.

We have these discussions at Betterment too and place huge importance on optimizing our portfolio.

But for the average investor who doesn’t do this for his or her day job, I can’t help but wonder if this kind of deliberation is a waste of time. See -- all index portfolios are, more or less, created equal.

I worry that people get so caught up in the pursuit of the perfect portfolio, that they forget to ask the right questions.

In reality, it is not miniscule tweaks to your portfolio, but the answer to these five questions that will have most impact on the health of your long-term wealth:

1. Am I okay?

Only 52% of Americans feel confident they will be comfortable in retirement. Seven years ago, that number was 70%. And despite aging populations and rising educational costs, America's savings rate has been falling.

Consistently saving and investing those savings is the only way you are going to be okay. A good rule of thumb is to invest 20% of your paycheck throughout your entire career.

2. Am I saving for the right things?

Humans have a hard time empathizing with our future selves. Without the right plans in place, it’s unlikely you will think to save a share of funds for yourself in your older years. Goals are a powerful motivator for saving, making the future tangible and more attainable.

People who set specific goal targets at Betterment are more likely to automate their investing behavior by approximately 3 times, evidence that working toward a goal makes positive action more likely.

3. Am I saving enough for my goals?

If you know what you want and you know when you’re likely to want it, the next questions to ask is are you on track to achieving it?

If not, perhaps you need to dedicate more funds to your savings, increase your time horizon, or increase your exposure to risk if appropriate.

4. Am I taking on enough risk?

Simply put, it’s costly to not take on risk. It’s a myth that low interest savings accounts are “safe”. If you choose to lump your money into one for the long time, the funds are unlikely to grow – barely keeping up with inflation. Investing in the stock market with the right asset allocation appropriate to your goal and time horizon is a smarter way to build wealth.

5. Am I screwing it up?

If you react to market movements, try to time your buys and sells, forget to rebalance your account, or ignore high fees on your account, you are making the costliest mistakes of all. It is not what’s in the portfolio that matters, but how investors behave when invested in that portfolio. The biggest favor you can do your portfolio is remove yourself from the equation.